Change Your Formula: A Two-Step Process to Become ‘Profit First’

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Author: Kam Kaila, partner and president, IT By Design

We’re all small businesses. The Small Business Association says that if you make less than $25 million annual revenue, you’re a small business. We’re one of 28 million across this country. As a small business, not all of us have CFOs to help support our growth and many of us are struggling to be profitable. What are we doing wrong? 

I found the answer to this troubling question in a book called Profit First by Mike Michalowicz. In it, Mike says our math is all wrong. The traditional formula for businesses to run has been: Sales – Expenses = Profit

But that’s wrong! We need to change it to: Sales – Profit = Expenses 

I know, we say to ourselves, “But we’re in growth mode, we need to invest in our companies.” Or your team says, “There’s just no way we can run that lean.” Well, Mike says “That’s too bad!” And he says “Yes, you can.” Our delivery systems are created to expand as we add every new customer. The costs continue to rise, and what we don’t realize is that our profit never moves. Our businesses are sucking the life out of our bank accounts.

So what to do? Don’t worry, we’ll take this slowly.

Step 1: Open a Profit-First Bank Account

That’s our homework for the week. We’re all going to decide how much profit we need to generate in our business. Is it 5%, 10%, 15%? Whatever that number is, we’ll transfer that percentage from every sale into our Profit account. For example, if I close a $10,000 project, there should be enough margin in that project to put aside $1,000 for profit (assuming 10%).

Now, don’t try to cheat the system and underpay yourself, or worse, not even pay yourself. There’s a fine balance between milking the company and being fair to yourself. You work hard and you should be paid for it. This is hard-earned money that every team member should cherish. So, let’s find a good number for profit. For the sake of this series, we’re going to use 10%. We’re all going to open Profit-First accounts, but let’s put it in a different bank from your operating account. “Out of sight, out of mind” so you won’t see it and feel tempted to use it.

Mike talks about money problems being caused by two things: Sales slowdown or speed up. When sales speed up, so do our expenses, and if the cash flow is not consistent, it’s tough to manage. As he so truthfully says: “Revenue is vanity, profit is sanity, and cash is king”

So, slow down your sales, fix your Profit first, and then grow. Profit needs to become a habit for all of us.

Step 2: Don’t Become Ernie

I loved an example that Mike used early in the book. His landscaper, Ernie, was a great guy who did his job really well. One day he rang Mike’s doorbell and offered to clear the leaves in the gutter. Mike said great. He came back and said, well the roof and chimney need some work, do you want me to fix that as well?

“Noooo, Ernie! Say it ain’t so.” Ernie fell into the trap of “Sell, baby, sell” rather than to concentrate on what he does best. Now Ernie was going to have to buy a ladder, learn how to fix a roof, and find someone capable of fixing the chimney. Hmm….. is this profitable work?

For an MSP, we often become an Ernie. How many of us have taken on a VM project without in-house talent or resources to support it? Then we’re in a mad rush to find people. Or wait, tell me if you’ve heard this one before: “I have a client and he asked me if we can also help with…..”

Or we love to build things in-house. Let’s build our own NOC, or SOC, and since we’re a boutique firm and like to give white-glove service, we need to do all this ourselves. STOP! Don’t be Ernie. Sustained profitability depends on efficiency, according to Mike. Don’t be the jack of all trades; master the process of delivering your service perfectly and efficiently, and what you can’t deliver well and PROFITABLY, don’t do it!

Now to think about our services. Let’s do an assessment and see where we’re being Ernie and how we stop. Let’s look at what we need to deliver in-house, and what we can outsource, so that we remain profitable and do what we do best.


This guest blog is courtesy of IT By Design and authored by Kam Kaila, partner and president. Read more IT By Design guest blogs here. Regularly contributed guest blogs are part of ChannelE2E’s sponsorship program.

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